My Lords, I have a particular interest to declare as a director of NBNK, which was one of the two bidders for Lloyds’ 632 branches. It was the unsuccessful bidder; they went to the Co-op, and now to an IPO. I have also advised in the past on derivatives in relation to interest and inflation hedging. I shall speak to the importance of retail banking to our society and competition in that sector, and to the consequent responsibility of Government and this House to reform those areas with great care.
The Government have accepted—in the comments made by the noble Lord, Lord Deighton, in opening—the conclusions of the parliamentary commission. The Lord Chancellor, the Chancellor of the Exchequer and the Secretary of State for Business have accepted the following words: banks in the United Kingdom are not doing enough to carry out their core role of financing economic growth; many of them have also failed taxpayers, their customers and their shareholders; and trust in banking is at a low ebb. A reform designed to deal with such a situation is, as I have said, of great moment.
Why is retail banking of such social importance? The facts: the largest four banks in this country have 77% of the personal account business and 85% of SME business, which, on its face, is a huge concentration of economic power; and those banks administer £6 trillion of assets, which is four times our GDP. It was thought by the Vickers commission that around 20% of that
would be the subject of ring-fencing of the retail banking sector—£1.5 trillion—affecting four people out of five in this country. It follows that the size of such giant banking corporations makes them of great significance in our society. Therefore ring-fencing is not an interference with their freedom to do business; it is a step taken to ensure that they do business in a way that reflects their importance to society. So there is a need to act—to restore trust by the steps promised by the commission and, somewhat, in this Bill.
In its present form, the Bill identifies the importance of core services in the retail sector. That gives statutory acknowledgement to the obvious. What is of even greater importance is how to give protection to those core services. “Ring-fencing the retail sector”, “the personal liability of directors and senior persons”, “promoting competition”—none of those words appears in the Long Title of the Bill. Indeed, once you get past Clause 1, as the noble Lord, Lord Higgins, pointed out, and you get past the objectives, the density becomes ever more impenetrable. That is not the programme for reform. Reform should bespeak what, why, how and when. This Bill in its present form does not satisfy those tasks.
I turn to the issues that I wish to concentrate on briefly: ring-fencing, personal liability and competition. I think that I am the only practising lawyer in the speakers list on the Bill. I can guarantee the House that many, many more lawyers will be working on this for a long time to come, at enormous expense. The flurry of paperwork arriving on Ministers’ laps this evening will be as nothing to the amount of paper that this will generate. Why? Because of the power that I have just illustrated to the House. It is inevitable that people with such power will seek to protect, as they think fit, their economic interests.
The noble Lords, Lord Higgins and Lord Flight, and my noble friend Lord McFall were correct to emphasise that these institutions are too big to manage in their present form. They are not too big to manage in the retail sector once that has been ring-fenced and separated. The purpose of ring-fencing is therefore self-evident. There should be, in consequence of its importance, a reserve power—a compulsory power to enforce ring-fencing to the extent thought necessary to protect the public interest. Why? Without that power, the flurry of legal activity will go on for years. The ultimate threat that society will have through a reserve power is, “If you are not reasonable, you will suffer the consequence”. Any commercial negotiation would seek to introduce a long-stop protection, and that is what a reserve power does, creating no injustice and no concern to responsible banking. Ring-fencing should come in.
I turn now to personal liability of directors and senior persons. It is important for the Government and their advisers, as well as this House, to realise how the industry and its lawyers will investigate ring-fencing and personal liability. They will first look to whether there are statutory duties for directors, as in the most recent Companies Act. Secondly, they will look to regulatory rules that require specific behaviour. They will then look to the specific—specific—consequences that will follow from a breach of duty or failure to
obey the rules. Duty, regulation, consequences: that will be their analysis. This Bill should reflect that state of reality in terms of enforcing a Bill of this kind.
The role of lawyers that I have described will be followed by potential judicial review, first against the Treasury, secondly against the regulator, thirdly against any other statutory body or decision-making entity created by orders that flow from this Act, and also by attention from the insurance industry to the D&O liability of directors in banking, the premiums for which could become extremely high. All that will flow in any event. We should prepare for that now by making the Bill as clear as we can in Committee.
Lastly, I turn to competition. The Government have said that they want this Bill and other action to promote competition, especially in the retail sector; to create, as Vickers wanted, a challenger bank—I underline challenger—to the existing banking system: not a small bank of moderate size with branches only in the tens or twenties, but hundreds of branches of significant size that will compete with the biggest banks. How do the Government suggest that this Bill, with any ancillary policies, will promote such a challenger bank? If there is no solution to that at this stage, then as the noble Baroness, Lady Kramer, predicted, it could be a generation before a new bank emerges through organic growth—if then.
The European Commission ordered Lloyds to divest itself of 630 branches about four years ago. The time to implement that divestment will run out in three months or so. As far as is known, Lloyds has not yet applied for an extension and it runs out in November or December, I think. So getting into the fifth year from the European requirement, maybe we will have an IPO. Floating an IPO for a bank in the present circumstances is not an easy commercial task. If it does not work, where will the challenger bank come from? If it does work through an IPO, it will be pretty well dependent on the existing Lloyds structure for information technology and systems for a long time to come. If the House will forgive me, a “Son of Lloyds Bank” is not a new challenger bank.
This is serious stuff if with this Bill it appears that we change the law to finish up with the same big four and the same system, except for ring-fencing, with no serious competition. That is not really what the public are entitled to expect.
In conclusion, this Bill is an enormous task for Ministers and all the House. The final Bill requires three particular characteristics. The first is clarity. Everybody will look at what they are required to do and what the consequences are if they do not do it, both in ring-fencing and in personal liability. You cannot avoid clarity and—as the noble Lord, Lord Stewartby, pointed out—with this complexity it is no good hoping that the Minister, doing his best with Treasury help, might at some stage tell us what he thinks an ambiguity in the text really means. The last time I argued in the House of Lords Judicial Committee—now the Supreme Court—this principle of what the Minister said, I was accused by one of the noble and learned Lords of a tedious exercise in what he called legislative archaeology. It is an utter waste of
time. The Bill should say what it means and mean what it says. That is our job, especially after such a crisis. Clarity is a high aspiration, but a necessary one.
Secondly, there should be coherence. We have a Bill, statutory orders and the regulatory authority, and will probably have codes of conduct and banking standards—a proliferation of different modes of behaviour. They have to fit in with each other. The absence of interrelation is what the lawyers and bankers will look for. So we need clarity, coherence and finally common sense. Do not those who have £6 trillion in a society have a responsibility to treat themselves as being in a form of societal partnership with their 50 million customers—the 87% and the 85%? If it is a form of social partnership, then common sense suggests that both sides should stick together to make it work. Coherence, clarity, common sense are what we need.
If we pass this Bill in much of its present form, how will anybody know how to find out about this reform? They would have to superimpose the present Bill on at least two other statutes and extract as best they could from the superimposition a notional generic Bill for banking reform, which would be an extremely difficult task. It is not too late and it is not about starting again, but about a revision of presentation. It is not too late to state principles with schedules of consequential amendments to other legislation to inform an understanding of this major legislation.
I finish where I started. The Bill is of such importance. If society cannot trust its banks what on earth can it trust? It is of such importance to the Government and to this House that we have to take real, reasonable and hard-working steps to get this right. On this side of the House I am sure that we will look to co-operate with all others. It seems to be left to us to ensure the protection of the people in banking for the future. Let us get it right.
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